Check Out Just How Damaged German Banks Would Get If The PIIGS Default

Germany's substantial financial contribution to a PIIGS bailout may be less benevolent than it seems.

Its banks were stung by sub-prime during the U.S. financial crisis, and are being oddly quiet about their financial exposure to European nations such as Greece, Spain, and Portugal.

For example, RBC Capital Markets believes that German Landesbankes have only disclosed 25% of their actual exposure to troubled European periphery nations. This compares to 70% disclosure by French banks, according to the firm.

While the Organisation for Economic Co-operation and Development (OECD) estimates that German banks' exposure to Greece amounts to just 0.5% of their total assets, if you add exposure to Spain and Portugal then the number to run north of 10%, or $330.4 billion according to Risk.net.

For even a moderately leveraged bank, with say 10-1 leverage, having 10% of assets at risk of default is pretty serious. Given that some banks will have more or less exposure, we can easily imagine how the more highly exposed German banks would be insolvent if multiple PIIGS nations were to default.

“German bank balance sheets were already in trouble due to their subprime-related assets. If, on top of that, you get a hit on the sovereign debt on bank balance sheets, that could pose a problem for sure. How serious that would be, or how the government would deal with it is very uncertain. It’s a clear risk,” says Felix Hüfner, a senior OECD economist.

Jeremy Beckwidth of Kleinwort Benson concurs, saying via Risk.net: “It’s clear that German institutions have very large exposures to Mediterranean government bonds. But I don’t think they can afford to give you more transparency and disclosure because the numbers would terrify everybody."